## I N THE COU RT OF AP PE ALS OF TENNE SS EE AT J ACK SO N Septe m ber 22, 200 4 S es sio n CIT ICO RP MORTGAGE , INC. v. BANCORPSO UTH BANK A D i re ctA p p eal from t h e C h an ce ry C ou rtfor Sh el b y C ou n ty N o. 10 1815 - 2 The Hon or abl e A r nol d B. G ol di n, C han c e l l or

N o. W 2004 - 0033 2- C O A - R 3- C V - Fi l e d N ove m ber 19 , 20 04

Thi s c a s e ar i s e s f

r om tr i a l c our t ’ s de ni a l of A ppe l l a ntBa nk’ s r e que s tforequ i t a bl e s ubr og a t i on of A ppe l l e e Ba nk’ s l i e n t o Appel l a ntBa nk’ s l i e n. Be c a use A pp el l antBa nk ha d k now l e dg e of A p p ellee B an k ’s d eed o f tru st p rio r to m ak ing the lo an , A p p ellan t B a n k is no t entitl ed to eq u it ab le s u b r o g a t i o n . W e a f

f i r m.

T en n . R . A p p . P . 3; A p p eal as of R i gh t; Ju d gm en t of

th e C h an cery C ou rt A f f i rm ed
W. F RANK C RAWF ORD , P.J ., W.S., deli v ered the o pinio n o f the co urt, in which D A VID R. F A RMER , J. and H OLL Y M. K I RBY , J., j o ined. Mich aelC. Patt o n a ndT ho mas F
. Barnetto f Memp hi s f

o rAp pel l ant , Ci ti co rp Mo rt g ag e, I nc. John B. Philip o f Memphis f o r Appell ee, Bancorps o uth Bank OP I N I ON I n D ece m b er , 1 9 8 9 , W il b u rn W . Jo h n s (“ Jo h n s”) o w n ed p ro p er ty at 42 6 2 P o p lar A v en u e in M em ph i s, T enn essee (the “ P rop erty ”). A t that t i m e, Joh ns d eci ded t o refi nan ce the indeb t edn ess that w as sec ure d b y lien s on the P rop erty . O n D ecem ber 6 , 198 9, Joh ns su bm i tt ed a R esi den t i al Loan A pp li catio n ( the “L oan A ppl i ca t i on”) t o M cSw ai n R ea l t ors, w hi ch w as am em berof Ci t i corp M o rtgag e, I n c.’ s (“ C itico rp ,” “ P laintiff,” o r “ A p p ellan t”) M o rtgag e P o w er P ro gra m . Jo h n s so u gh t a l oan f rom C i t i corp i n the am ou nt of $2 53 ,70 0.0 0 an d ind i cat ed thathe w anted t o refi nan ce the secured i nd ebtedn ess t o o btai n a l ow er i nterestrat e w i th a sho rt er t erm of repaym ent. O n the Loan A ppl i c a t i on, J ohns l i s t e d t w o l oa ns , on e f r om Em pi r e of

A m e r i c aRe a l t y Cr e di tCorp. i n t he a m ountO n O c to b e r 1 9 , 1 9 8 9 , J o h n s h a d e x e c u te d a p ro m isso ry n o te in w h ic h he p ro m ise d to re p a y $ 1 8 7 ,6 0 0 .0 0 to 1 E mp i r e. T he i nt er es tr at e on the E mp i r e Loan was 10. 5%

. T he t er m o f t he E mp i r e Loan was t hi r t y ( 30 ) y ear s . T he deed of t r us ts ecu r i ng t he E mp i r e Loan ( t he “ E mp i r e D eed of T r us t ”) was ori gi nal l y r ecor ded o n O ct ob er 30, 198 9 as I ns t r umentN o. B H 4 11 9. I twas r e- r ecor ded o n N ovemb er 13, 198 9 as I ns t r umentN o. B H 954 7 i n the R egi s t er ’ s O f f i ce o f S h e lb y C o u n ty.

O n O ct ober24, 1989, J oh n s e x ec u t ed a pr omi s s or y not e i n wh i ch he promi s ed t o re pay $54, 000. 00 t o G r ay s on 2 Sm i t h. T he i nt er es tr at e on the Sm i t h Loan was 1 5. 0%

. T he Sm i t h Lo an was o nl y for t wen t y - one ( 21 ) day s . I tmat ur ed on N ovemb er 14, 198 9. T he deed of t r us tfor the Sm i t h Loan ( t he “ Sm i t h D eed o f T r us t ”) was recor ded on N ovemb er 2 , 1 9 8 9 , as In stru m e n t N o . B J 2 8 8 8 , i n the R e g ister ’s O ff ic e o f S h e lb y C o u n ty. Shelby B ank’ s success o r i n i nt eresti s B ankco rpS o ut h B ank, fo rme rl y know n as V o l unt eer B ank. 3 B an k cor pSou t h a cqu i r ed ce r t ai n of t h e as s et s a n d i n t er es t s of She l by B an k a n d a s s u med ce r t ai n pot en t i al l i abi l i t i es of Shel by B ank , i ncl udi ng an y l i abi l i t y i n thi s act i on. For pur po s es of t hi s O pi ni on, and for t he s ake of cl ar i t y , we wi l l r ef er t o t he A p p el l ee herei n as She l b y B ank. 

### -2- of $1 87, 600. 00 ( the “Em pi r e L oa n” ) a nd a nothe r f r om G r a y s on Sm i th i n the a m ount of $5 4, 000. 00 1 (the “Sm i th L oan”)

. 2 Johns ow ned a nd opera t ed ac om pany c al l ed N ati onal A ut o L eas ing , Inc. ( “N ati onal ”)

. N a t i ona l w a s a n a ut om obi l e w hol e s a l e bu s i ne s s i n She l by Co un t y . Si nc e J une , 19 88, She l by Ba nk (“D ef endant , ” “A ppel l ee ”) had provi ded f i nanci ng t o N ati onal through al i ne of c re di t
. I n D ec em ber , 3 1989 , N a t i ona l ’ s l i ne of c r e di tw a s i n the a m ountof $2 00, 000. 00 a nd ha d b e c om e atr oubl e d l oa n. Shel by Ba nk s oug hta ddi t i ona l s e c ur i t y a nd J ohns a g r e e d t o g i ve She l by Ba nk ade e d o f tr us ton the P ro p er ty as ad d ition al secu rity o n the line o f cr ed it

. O n Dec e m be r1, 19 89, J ohns e xec ut e d ade e d o f tr us ti n f a voro f S helby Ba nk ( the “She l by B ank D eed o f

T rust”). O n D ecem ber 6 , 198 9, the S helby B ank D e e d o f T rust w as recorded as I nstrum ent N o. B J 86 69 i n the R egi st er’s O f f i ce of S helby C ou nty
. T he S helby B ank D eed o f T rust con st i tuted a third li en o n the P rop erty . O n his Loan A pp l i cat i on t o C i t i corp , J oh ns fai l ed to discl ose the ind eb ted n ess secu re d b y the S h elb y B an k D eed o f T ru st. M c Sw a i n Re a l t or s sub m i t t e d t he Lo a n A ppl i c a t i on t o C i t i c orp. As p a r tof the pr oc e s s i ng of the Lo an A p p li catio n , C itico rp r eq u ired a n a p p ra isal o f th e P ro p er ty
. O n D ece m b er 7 , 1 9 8 9 , M elan ie L. M a r tin an d Ja m e s F . G a te s ex e c u te d a U n ifo r m R e s id e n tia l A p p r a is a l R e p o r t as to th e P r o p e r ty, w hi c h e s t i m a t e d the va l ue of the Pro pe r t y t o b e $3 20, 000. 00. O n or abo ut D ec e m be r28 , 19 89, Ci t i c orp c ondi t i ona l l y appr ove d al oa n t o J ohns i n the a m ountof $2 53, 700. 00. O ne of

the c ondi t i ons of the l oa n was tha t“[ a ] l l l i e n l oa ns on sub j e c tpro pe r t y [w e r e ] t o be pai d i n f ul l w i th the pr oc e e ds of this l o an .” A n o the r co n d ition w as th at C itico rp rec eiv e a ti tl e ins u ra n ce co m m itm en t sh o w ing it“ in f i rstl i en p ositi on .” Johns se l ec t ed att orney M i cha el G

. M addox (“M addox ”) t o cl ose the l oan. O n o r b efore D e c e m be r13 , 19 89, M a ddox e xam i ne d the ti t l e h i st ory of the Pro pe r t y a nd di s c ove r e d the She l by Ban k Dee d o f

Tru s t
. M a ddox the n p r e pa r e d a nd i s s ue d a“Com m i t m e ntf orTi t l e I ns ur a nc e ” ( the “Com m i t m e nt ” ) a s t o the l i e n o f the de e d o f

tr us ttha tw oul d s e c ur e the l oa n f r om Ci t i c orp t o J ohns i n the a m ountof

$2 53, 700. 00 ( the “Ci t i c orp Dee d o f Trust ”). The r e qui r e m e nt s s e c t i on of the

### -3-

C o m m it m e n t s ta te s th a t th e E m p ir e D e e d o f T r u s t a n d th e S m it h D e e d o f T r u s t m u s t b e r e le a s e d

. It f ur the rs t a t e s t ha tt he S he l by B a nk D e e d o f Tru s tm us tbe r e l e a s e d o rs ubor di na t e d t o the l i e n o f the Ci t i c orp Dee d o f

Tru s t
. Ci t i c orp, ho w e ve r , w oul d n ota g r e e t o the s ubor di na t i on of the l i e n o f

the S helby B ank D eed o f

T rust t o the l i en o f

the C i t i corp D eed o f

T rust. I nstead, C i t i corp req uired that the S h elb y B an k D eed o f T ru st b e re lease d

. S inc e C itico rp re q u ired all o f the li en s o n the P ro p er ty to be r el ea se d, M addox c ont ac t ed Shel by Bank aboutthe r el ea se of i t s dee d of

trust
. O n or about Ja nuary 9, 19 90, D a nny O

. E at on , the pr e s i de ntof She l by Ba nk, s e ntal e tt e rc onc e r ni ng N a t i ona l ’ s l i ne of credit

. T he lett er st at es:

W i l l Joh ns D B A N at i on al A uto Leasi ng, I nc. has been do i ng b usiness w ith S h elb y B an k sin ce J u n e 1 1 , 1 9 8 8 . A $ 2 0 0 ,0 0 0 .0 0 li n e o f cr ed it i s s e tup a nd r e ne w e d o n ay e a r l y ba s i s . Al l pa y m ents are m ade by N ati onal A ut o L ea si ng, I nc. a nd h av e bee n bond ed i n a sa t i sf ac t ory m an o r [s ic]. The Boa r d o f

D i r e c t or s of

She l by B a nk ul t i m a t e l y re f us e d t o s ubor di na t e orr e l e a s e the She l by Ba nk D eed o f T ru st. Som e t i m e pr i ort o J a nuar y 10 , 19 90, Ci t i c orp se ntc l os i ng i ns tr uc t i ons t o M a ddox. One of the c l o s i n g i n s tr u c t i o n s t o Ma d d o x wa s th a tC i t i c o r p woul d b e i n a“ c l e a rf i r s tl i e n p o s i t i o n . ” An a ddi t i ona l i ns tr uc t i on r e qui r e d tha t“[ a ] l l l i e n l oa ns on s ubj e c tpr ope r t y t o b e pai d i n f ul l [ w i th] pr oc e e ds

. ” J ohns w a s no tt o r e c ei ve any of the pr oc e e ds of the l oa n. The c l os i ng i ns tr uc t i ons f r om C itico rp req u ired that the li n e o f cr ed itsecu re d b y the S h elb y D eed o f T ru st b e p aid in fu ll

. O n Jan uary 10 , 199 0, C i t i corp l oan ed $ 25 3,7 00 .00 t o John s. A t the closi ng, Joh ns ex ecuted a R api d E qui t y M ort ga ge N ot e and the Ci t i corp D ee d of Trust
. The proper t y des cr i bed i n the Ci t i corp D e e d of T r us ti s the s a m e pr ope r t y de s c r i be d i n the She l by Ba nk D e e d o f Tru s t , the Em pi r e D e e d o f Trus t , a nd the Sm i th Dee d o f Tru s t
. Des pi t e the e xpl i c i t i ns tr uc t i ons f r om Ci t i c orp a s t o r e l e a s e of the S helby B ank D eed o f T rust, M add ox sub sequ entl y disbu rsed the l oan pro ceeds t o p ay the indeb t edn ess ow e d u nde rthe Em pi r e L oa n a nd the S m i th L oa n. The Em pi r e D e e d of Tru s ta nd the Sm i th Dee d o f T rust w ere subseq uen t l y rel eased. N o fun ds fro m the C i t i corp l oan w ere used to pay Joh ns’ i nde bt e dne s s w i th She l by Ba nk a nd Shel by Ba nk ne ve re xec uted a R el ease of the She l by D e e d o f T ru st. O n o raboutJ a nuar y 26 , 19 90 , M a ddox s ubmi tt e d the c l os i ng do c um e nt s t o Ci t i c orp. The c l os i ng do c um e nt s i nc l ude d the c l os i ng i ns tr uc t i ons t o M a ddox. On the c l os i ng i ns tr uc t i ons , M a ddox s i g ne d the a c knowl e dg m e nttha the ha d i ns ur e d tha t a l l of the i ns tr uc t i ons ha d be e n f ol l ow e d. I n the po st -cl osing do cum ent rev i ew p rocess, C i t i corp d i d no td i scov er that the S helby B ank D eed o f T rust ha d n otbe e n r e l e a s e d. I n 1 991, J ohns de fa ul t e d o n h i s pa y m e nt obl i g a t i on t o Ci t i c orp. A t the t i m e of the de fa ul t , the o u tstan d ing ind eb ted n ess w as $ 2 5 3 ,6 9 1 .9 2

. I n tere st c o n ti n u ed to a ccr u e o n the o u tstan d ing p rin cip al.T he i ndebt ednes s o f Jo hn s t o C i t i corp was d i s cha r ged p ur s uan tt o an O r der of t he U ni t ed St at es B ank r upt cy 4 C o urtfo r the W est ern D i stri ct of T enness ee. A s a res ul t , C i t i co rp no l o nger has a cl ai m agai nstJo hns i n t hi s act i o n.

T he A m en d ed C o m p l aint al so asserts cl aim s aga i nst M a d d o x ’s f i rm , M ad d o x & R o b erts, an d ag ainst 5 M ad d o x’ s b u sin e ss p a rt ner, Jo hn P

. R o b ert s. A Jud gm ent by D efaul twas ent ered agai nstM ad d o x. H i s current whereab o ut s are unknow n, b ut he i s l ast b el i eved t o have b een i n B o l i vi a, So ut h A m eri ca. P urs uant t o an O rder o f t he C ha nc ery C o urt o f

S he l b y C o un t y, w hich w as a f f i rm ed b y the S up rem e C o urt o f T en ne ssee , C i t i co rp ’ s claim s aga i nst R o b e rts i n h is ind ivid u a l a n d p a rtn e rs h ip c a p a c iti e s a re b a rr e d u n d e r th e a p p lica b le sta tute o f lim itatio n s. A s a re su lt, C i t i corp n o l ongerha s a c l ai m agai ns tRo bert s i n thi s ac t i on. D ef endan t , M addo x & Ro bert s i s a par t ner s hi p orga ni zed and e xi s t i ng un der t he l aws of t he St at e of

T enn es s ee wi t h i t s pri nci pal pl ace of bus i nes s i n Sh el by Co un t y , T enn es s ee. P ur s uan tt o an O r der of t he C han cer y Co ur tof

Shel by Co un t y , wh i ch was af f i r med by t he Supre me C our tof T enn es s ee, C i t i co rp ’ s claim s aga i nst R o b erts i n his p artne rship ca p ac i t y are b arre d und er the a p p l i ca b l e statut e o f l i m i t ati o ns. 

### -4- I n S e p te m b e r , 1 9 9 1 , c o u n s e l fo r C itic o r p in itia te d fo r e c lo s u r e p r o c e e d in gs ag a in s t th e P r o p e r ty. 4 D uring a titl e search m ade in con j un ct i on w i th the f

oreclosu re, cou nsel f

or C i t i corp discovered that the She l by Ba nk D e e d o f Tru s tha d n otbee n re l e a s e d. W he n D a vi d C oc ke , as c ouns e l f orCi t i c orp, con t act ed M add ox abo ut the u nreleased S helby B ank D eed of T rust, M add ox cl ai m ed thata rel ease ex i st ed. M add ox , how ever, nev er pro du ced the trust deed rele ase. I n the fal l o f

1 99 1, N at i on al d efault ed on it s o bli gati on s to S helby B ank . T hereaft er, cou nsel f orShe l by Ba nk i ni t i a t e d forecl os ur e pr oc e e di ng s a g a i ns tthe Pro pe r t y . On N ove m be r15 , 19 91, cou nsel f or S helby B ank sent a l ett er t o C i t i corp no t i f y i ng itof the pen ding f

oreclosu re o n D ecem ber 17, 1991. O n D e c e m be r17, 1991, S he l by B a nk f or e c l os e d u pon the She l by Ba nk D e e d o f Tru s ta nd pur c ha s e d the Pro pe r t y att he for e c l os ur e s a l e f or$2 25, 000. 00. Ci t i c orp d i d n ott a ke a ny a c t i on t o s t op the f or e c l os ur e f

r om oc c urr i ng on D e c e m be r17 , 19 91. Ci t i c orp d i d n otbi d o n the Pro pe r t y a tthe f or e c l os ur e s a l e on D e c e m ber 1 7, 1991

. She l by Ba nk s ubs e que nt l y c onve y e d the Pro pe r t y t o a purcha se r. O n A ugu st14 , 199 2, C i t i corp f i l ed thi s acti on . O n A ugu st17 , 199 2, C i ticorp record ed an A bs tr a c tof

Sui t( L i e n L i s Pe nde s ) a s I ns tr um e ntN o. CZ 9920 i n the Re g i s t e r ’ s O f f i ce of She l by C ou nty
. O n N ov em be r 1 7, 19 98 , Cit i corp f i l ed it s “A m end ed C om plai nt f or M on ey D am ages, Subr og a t i on of

Li e n an d O the rA ppr opr i a t e Re l i e f ” ( the “A m e nde d Com pl a i nt ” ) a g a i ns tShe l by Ba nk and M add ox . T he A m end ed C om plai nt set s f orth C i t i corp ’s cl ai m f

or eq uit able s ub rogati on of i t s l i en 5 t o the f i rstl i en p ositi on . O n M ay 9, 20 01 , S helby B ank f i l ed it s A nsw er. S helby B ank f i l ed an A m e nde d Answ e ron A ugu st12, 20 03. A j oi ntSt i pul a t i on of Fa c t s w a s f

i l e d b y the par t i e s on S eptem ber 1 0, 20 03

. T he case w a s h e a r d o n D ecem ber 1 1, 20 03

. T he tri al cou rtentere d is “ O rder o f F i nal Jud gm ent” (the “ O rder”) o n Jan uary 12 , 200 4. T he O rder read s, i n relevant part , a s f oll ow s: 1) M i chael G . M add ox (hereinaf t er ref erred to as “ M add ox ”) requ est ed that S helby B ank sub ord i nate or rel ease the l i en o f i t s deed o f

trust so that the li en o f

the d eed o f

tru s t b e nefi tt i ng C i t i corp M ortgage , I nc. ( he r e i na f t e rr e f e r r e d t o a s “Ci t i c orp” ) w oul d b e the f i r s tl i e n o n the s u b je c t p r o p e r ty.

### -5- 2) The Boa r d o f

D i r e c t or s of

She l by Ba nk de c l i ne d t o d o s o. 3) Be c a us e of

the de c i s i on of

the Boa r d o f

D i r e c t or s of

S he l by Ba nk, the loan from C i t i corp t o W i l b u r n W
. J oh ns sh ou l d n ot have b een f unde d. 4) A s ar e s ul t , a s t o Ci t i c orp’ s c l a i m f ore qui t able su brog a t i on, the eq u ities fav o r S h elb y B an k , an d th e r efo re , C itico rp is no t entitl ed to e qui t a bl e s ubr og a t i on. C i t i corp app eal s and rai ses one i ssue f or revi ew as st at ed i n it s brief : W hether C i t i corp M ortgage , I nc. s houl d b e e qui t a bl y s ubr og a t e d t o the l i e n pos i t i on of the c r e di t or s w hos e l oa ns w e r e s a t i s f i e d wi th the pro ceeds of a ref

i nan ci ng loan w hich C i t i corp M ortgage , I nc. m ade? S i nce thi s case w as tri ed b y the co urt si tt i ng w i tho ut a j ury, w e revie w the case de n ovo up on the r e c or d w i th apr e s um pt i on of c orr e c t ne s s of

the f i ndi ng s of

f a c tby the tr i a l c our t
. Unl e s s the eviden ce p repo nd erat es agai nst the fi nd i ngs, w e m ust af f i rm , absen terror of l aw . S ee Tenn
. R. A pp. P
. 13(d). G enerall y , l i ens are gi ven priority based o n the ord er i n w hich they are recorded ; l i ens record ed f i r s t t y pi c a l l y ha ve pr i or i t y ove r thos e r e c or de d a t a l at er date

. S ee T.C.A

. . § 66-26-105 (2004). Sub r o g a t i o n i s th e s u b s t i tu t i o n o f a p a r t y i n th e p l a c e o f a c r e d i t o r , s o th a t th e p a r t y i n whos e fa vor s ubr og a t i on i s e xer c i s e d s uc c e e ds the c r e di t ori n r e l a t i on t o the de bt

. Ca s tlem an Con st r. C o. v. Penni ngton , 4 3 2 S .W .2 d 6 6 9 , 6 7 4 (T en n .1 9 6 8 ). S u b ro gatio n is a crea tur e o f eq u ity; it s p u rp o se is t o pro vide an eq uit able a djustm ent bet w een the part i es, based o n the fa ct s and ci rcum st ances of the case. Id . at 67 5 ; La wy e rs Title Ins . C or p . v . Unite dA m e ric a n B a nk , 21 F .S up p.2 d 7 85 , 792 n .2 ( W
. D
. Tenn
. 1998 )

. Iti s no tar i g ht , bu tar e m e dy w ho se ap pli cat i on de pe nds on aba l a nc i ng of the equ i t i es i nv olved

. S ee L a wyer 's Title , 2 1 F .S u p p .2 d a t 79 2 ; Ca stlem a n Co n str
. , 432 S.W

. 2d a t67 6. S ubroga t i on i s notappropri at e w her e the e qui t i es of the par t i es are e qual , w her e the parti es ' r i ght s ar e no t cl ear, or w here i t w ou l d prej ud i ce the l egal or equit able ri gh ts o f an o th e r. L a wyer 's Title , 21 F.Supp

. 2d a t79 2. Re l e va ntt o thi s ba l a nc i ng of e qui t i e s i s the de g r e e of

ne g l i g e nc e of

the par t y s e e ki ng sub rogati on . Id

. W hi l e or di na r y ne g l i g e nc e orm i s t ake al on e is us ua l l y no tabart o s ubr og a t i on, especial l y w here the equ i t i es w ei gh in the fa vo r o f the p arty seeki ng sub rogati on , c ulpab l e negl i gence w i l l general l y bar such a rem edy. See D i xon v . . Mor

gan , 285 S

. W
. 558, 562 (T enn. 1926 ). T his ca se w as tri ed o n sti pu l at ed f act s. T he s t i pu l at ed f

act s i nd i cat e that C i t i corp had actual knowl e dg e of

the She l by Ba nk D e e d o f Tru s tpr i ort o the c l os i ng of the Ci t i c orp l oa n: 61. Ci ti c orp h a d a c tua l no t i c e of the e xi s t e nc e of

the S he l by D e e d o f T rust because i ti s l i st ed in the C om m i t m ent f or T i t l e I nsu rance w hich M a ddox pr e pa r e d a nd f or w a r de d t o Ci ti c orp. 62. The no t e s i n the Tra ns m i tt a l Sum m a r y da t e d Dec e m be r21 , 19 89 as w el l as other do cum ents i n C i t i corp ’s f i l e i nd i cat e that Cit i corp w as

### -6- a w a r e of the e xi s t e nc e of

the She l by D e e d o f

Tru s tpr i ort o the c l os i ng on Janu ary 10 , 199 0.... C i t i corp ’s actual kno w l edge of the S helby D eed of T rust i s al so refl ect ed in the n otes of C i t i corp ’s l oan pr oc e s s or s , w hi c h wer e m a de pr i ort o the J a nuar y 10 , 19 90 c l os i ng . The no t e , da t e d J a nuar y 8, 19 90, and att ached as E x hibitX t o the sti pu l at ed fa ct s, st at es:

T h is l ine o f cr ed it[fro m S h elb y B an k ] M U S T b e clo sed , p aid in fu ll & re lease d o f re co rd . T h e b o rr o w er c o u ld re lease th is o f re co rd b u t cou ld s t i l l ha ve a[n ] o pen l i ne of c r e di t( thi s i s un a c c e pt a bl e ! ) Tha t ’ s w hy w e ’ d n e e d e vi de nc e of

pa y m e nti n f

ul l & c l os e d. T he fa ct s i nd i cat e that Ci tic o r p w anted t o b e the o nly l i enh older o n the P rop erty and that C itico rp w o u ld n o t agree to su b o rd ina ti o n o f the S h elb y B an k D eed o f T ru st:

62.

. . . Ci t i c orp r e qui r e d tha tthe She l by Ban k D e e d o f Tru s tbe r e l e a s e d. * * * 64. Ci t i c orp wou l d no tag r e e t o the s ubor di na t i on of the l i e n o f

the Shel by D e e d o f

Tru s tt o the li e n o f

Ci t i c orp Dee d o f

Tru s t , a nd Ci t i c orp r e qui r e d tha tthe She l by Ba nk D e e d o f Tru s tbe r e l e a s e d. 65. Ci t i c orp r e qui r e d tha ta l l e xi s t i ng i nde bt e dn e s s s e c ur e d b y the S u b ject P ro p er ty b e p aid in fu ll a n d e x ti n gu ish ed in c o n jun ction w ith i t s l oan t o Jo hn s. I n r e s pons e t o ar e que s ttha tCi t i c orp a g r e e t o as ubor di na t i on a g r e e m e ntw i th She l by Ba nk, C i t i corp ’s “R esub m i ssi on S heet,” dated Janu ary 8, 19 90 , a nd att ached as E x hibitY t o the sti pu l at ed fact s, reads, i n relevant part , a s f oll ow s: R E AS ON F OR R E S UB MI S S I ON: W i l l w e ok a su bordi nati on ag re em entt o S hel by Bank. T i t l e w ork show s 200,000 l i en a ga i nstproper t y ( i t ’s ali n e o f cr edi ton [J ohns’] bu si ness. T he b ank w i l l sub ord i na te i f w e’l l ok i t
. A tt ached i s [a] cop y of t i t l e w ork & deed t o S helby B ank

... . R E S P ONS E NE E DE D B Y: A SA P–t oda y i f

a ta l l po s s [ i bl e ]
. Cl os i ng W e dne s da y [ J a nuar y 10 , 1 9 9 0 ]. R E S P ONS E AND R E AS ON I F DE NI E D:St i pu l at ed fac tN u mber 63. 6
E q uit y ai d s t he vigi l an t , no tt ho se w ho sl ee p up o n their ri gh t s. 7
W he re o ne o f

t w o p erso ns m ust s uff

er lo ss he sho uld suf

fer w ho se a ct o r ne gli ge nc e o cc asio ne d t he l o ss. 8 

### -7- Sub[ or di na t i on] a g r e e m e nti s no tok ; c om bi ne d L TV e xce e ds 10 0% LT V (14 1.7 8% ) and al so b orro w er w i l l no tqu al i f y w i th p m t . m ust calcu late on the en ti re li n e o f cr ed it

. W heth e r th e r e w a s ev er an off er of sub rogati on on the tabl e, i ti s cl ear f rom C i t i corp ’s i nternal m e m o r a n d ath a t C itic o r p w a s n o t w illin g to ac c e p t su c h an o ffe rfro m S h e lb y B a n k . U ltim a te ly, ho w ever, S helby B ank ’s B oard of D i rect ors refused to ei ther su bo rdinate or t o rel ease the S helby D eed of Tru s t
. I n the f

a c e of t hi s know l e dg e , C i t i c orp co ul d ha ve done one of a tl e a s tt w o thi ng s t o s t op the los s th at actu ally o ccu rr ed

. S inc e C itico rp h ad k n o w led ge o f th e S h elb y B an k D eed o f T ru st p rio r to t he J a nua r y 1 0 , 1 9 9 0 c l o s i n g , Ci t i c o r p c o u l d h a v e s i mp l y d e c l i n e d t o l o a n mo n e y t o J o h n s . I n t he a l t e r na t i ve , Ci t i c orp c oul d h a ve l oa ne d J ohns s uf f i c i e ntf unds t o p a y of

f no ton l y the Em pi r e L oa n a nd the Sm i th L oa n b uta l s o e noug h t o pa y of f the N a t i ona l l i ne of

c r e di tw i th She l by Ba nk. She l by Ba nk coul d then ha ve c l ose d the l i ne of cr edi t , w hi ch i t w oul d l i kel y have bee n gl ad t o do gi ven i t s conce rn
“ abo ut the a m ountof

J ohns ’ l e ve l of

e xi s t i ng i nde bt e dne s s i f the She l by L i ne of

Cr e di tr e m ai ned ope n. ” O nc e the l i ne of c r e di tw a s c l os e d, She l by B ank w ou l d h a ve be e n o bl i g a t e d t o r e l e a s e the 6 S helby B ank D eed o f

T rust, thu s m ov i ng C i t i corp i nto fi rstpo si t i on . C i t i corp argues that i t s l oan t o John s w ork ed a ben ef i t t o S helby B ank

. S pecif i cal l y , the m on ey C i t i corp l oaned t o Johns w as use d t o pay of f the Em pi re L oan a n d th e S m it h L oan a nd the Em pi re D e e d o f Tru s ta nd the Sm i th Dee d o f Tru s tw e r e s ubs e que nt l y r e l e a s e d, w hi c h r e s ul t e d i n the She l by Ban k Dee d o f

Tru s tbe i ng m ove d i nt o the f i r s tpo s i t i on w i thoutShe l by Ba nk t a ki ng a ny a c t i on. C o n s e q u e n t l y , C i t i c o r p a s s e r t s th a tth e S h e l b y B a n k De e d o f T r u s ts h o u l d b e s u b r o g a t e d t o i t s o wn l i e n. Thi s ar g um e nti s t e nuou s a tbe s t
. W hi l e i ti s tr ue t ha t , w he r e on e c r e di t orm i s t a ke nl y pa y s the deb tof ano ther, T enn essee cou r ts h ave app rov ed eq uit able s ub rogati on , s e e D i xon v . Mor

gan , 28 5 S.W

. 55 8, 56 0 ( Tenn
. 19 26) , the f a c t s of thi s c a s e , as out l i ne d above , s how tha tCi t i c orp k ne w about the S helby B ank D eed o f T rust prior t o closi ng o n it s l oan to Joh ns. Y et , in the face of this kn ow l edge, C itico rp p ro c e e d e d to d isp er se th e fun d s. U n d er the p rin cip les o f eq u ity, C itico rp can n o t no w rely upon thi s Cour tt o undo w ha t i t c oul d ha ve pr e ve nt e d by e i the r r e f us i ng t o m a ke al oa n t o J ohns i n the fa c e of un s e t t l e d l i e n p os i t i on, orby a dva nc i ng s uf f i c i e ntf unds t o p a y of

f the She l by Ba nk i nd ebtedn ess, th e r e b y s e c uring the fi rstl i en p ositi on . S ee G i bso n' s S uit s i n C han cery (S even th E d.) M a xi m s a nd Pri nc i pl e s of Equi t y §§ 25 , 28

.

7 8 F or the f ore goi ng re as ons, w e af f i rm the O rde r of

the tri al c ourt
. Cost s of thi s ap p ea l are a s s e s s e d ag a in s t th e A p p e lla n t, C itic o r p M o r tga ge , In c ., an d its s u r e ty.

### -8- __________________________________________ W
. F R AN KC R AWFO R D, PR ESIDI NG J UD GE, W
. S.